Update 2: Twitter says they’ve learned a lot and responded with another blog post saying:

The problem with the setting was that it didn’t scale and even if we rebuilt it, the feature was blunt. It was confusing and caused a sense of inconsistency. We felt we could do much better.

I still don’t understand where they’re getting that the feature was confusing or caused a sense of inconsistency from. If you used it, you saw every tweet from the people you follow. That seems pretty simple to me.
Update: Due to the uproar over the “small settings update” Twitter has published a new blog post saying:

The engineering team reminded me that there were serious technical reasons why that setting had to go or be entirely rebuilt—it wouldn’t have lasted long even if we thought it was the best thing ever.

In other words, , “Remember how we told you we killed the option because it was undesirable and confusing”? Well really we had to kill it off because we don’t have enough resources to run our service.”

Bottom line: Twitter lied.